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1 1 (April 11, 2023)

handle is hein.crs/govelfw0001 and id is 1 raw text is: * Congressional Research Service Informing the legislitive diebate since 1914 April 11, 2023 Bank Failures: The FDIC's Systemic Risk Exception When Silicon Valley Bank (SVB) and Signature Bank failed, the Treasury Secretary, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve (Fed) announced on March 12, 2023, that the FDIC would guarantee uninsured deposits at those banks under the statutory systemic risk exception to least-cost resolution (LCR; 12 U.S.C. §1823(c)(4)(G)). (See CRS Insight IN12125, Silicon Valley Bank and Signature Bank Failures.) The FDIC insures deposits up to a statutory limit of $250,000. (See CRS In Focus IF12361, Deposit Insurance and the Failures of Silicon Valley Bank and Signature Bank.) Currently, the FDIC projects that the two resolutions will cost the FDIC $22.5 billion. The two banks' combined estimated uninsured deposits were $231.1 billion in 2022. Under LCR, at least some of these losses would have been borne by uninsured depositors. FDIC Least- ost Resolution When a bank fails, it does not enter the bankruptcy process like other businesses to resolve creditors' claims. Instead, it is taken into receivership by the FDIC, which takes control of the bank and resolves it through an administrative process. Costs to the FDIC associated with a resolution are funded by drawing on the FDIC's Deposit Insurance Fund, which is funded through assessments on banks and backed by the U.S. Treasury. (See CRS In Focus IF10055, Bank Failures and the FDIC.) A banking crisis in the 1980s was more costly to the FDIC, and ultimately the taxpayer, because of the frequent use of regulatory forbearance-allowing troubled banks to stay open-which in many cases increased the losses that they suffered before they were ultimately shut down. In some cases, the FDIC used open bank assistance to provide funds or guarantees to troubled banks to keep them going rather than taking them into receivership. Following the crisis, Congress reformed how the FDIC resolves banks in 1991 (P.L. 102-242). This act introduced prompt corrective action and LCR requirements as cornerstones of resolution. These two principles are intended to minimize resolution costs by ensuring that banks are resolved as quickly and inexpensively as possible. As such, uninsured depositors and other creditors can be repaid in a resolution only insofar as it is consistent with LCR, unless the systemic risk exception is invoked. What Is the Systermic Risk Exception? Systemic risk is financial market risk that poses a threat to financial stability. (See CRS In Focus IF10700, Introduction to Financial Services: Systemic Risk.) In the case of SVB and Signature, the FDIC, Fed, and Treasury Secretary were concerned that a run by uninsured depositors would spread to other banks, causing a broader crisis that could be detrimental to the real economy. Under the 1991 law, LCR can be waived under the systemic risk exception when five statutory requirements have been met: (1) The Treasury Secretary, in consultation with the President and upon a written recommendation of at least two-thirds of the boards of the FDIC and Fed, determines LCR would have serious adverse effects on economic conditions or financial stability and the FDIC's actions would avoid or mitigate those effects. (2) Any loss to the FDIC must be repaid through a special assessment on banks by the FDIC. In levying this assessment, the FDIC need not follow normal deposit insurance assessment rates and may consider who benefited from the action and the effects on the banking industry (as amended by P.L. 111-22). In testimony, FDIC Chair Martin Gruenberg confirmed that the FDIC will be levying a special assessment in this case. (3) The Treasury Secretary must document the decision. (4) The Government Accountability Office (GAO) must review the incident. (5) The Treasury Secretary must notify the congressional committees of jurisdiction within three days. Before 1991, the FDIC considered several goals, including cost, in determining how to deal with a troubled bank. As such, LCR, even with the exception, represents a constraint on its pre-1991 authority. The FDIC can take a number of actions under the exception, but it can be used only in an FDIC receivership. Previous Uses of the Exception Before 2023, GAO reported five planned uses of the systemic risk exception since 1991, all occurring between September 2008 (in the depths of the financial crisis) and March 2009. 1. Wachovia. The FDIC sought a buyer to prevent the imminent failure of Wachovia, the fourth-largest U.S. bank. Citigroup made an offer to acquire Wachovia under which the FDIC would partially guarantee $312 billion of Wachovia's assets using the systemic risk exception. The FDIC initially accepted this offer but subsequently rejected it in favor of a competing offer from Wells Fargo that required no FDIC assistance. 2. Citigroup. Concerned that Citigroup, the third-largest U.S. bank, would fail and exacerbate the financial crisis, policymakers decided to provide an assistance package involving the Fed, the FDIC, and the Troubled Asset Relief Program (TARP). As part of this package, the FDIC used its systemic risk exception to provide open bank assistance in the form of a partial asset guarantee for $306 billion of Citigroup's assets. This guarantee (joint with the Fed and TARP) never paid

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